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Looking for FTSE 100 bargains? I think the Shell share price could be worth 3,200p

If you are looking for FTSE 100 dividend bargains, then I highly recommend taking a look at oil major Shell (LSE: RDSB).

Even though shares in this FTSE 100 dividend champion have risen by more than 86% from their 2016 low, (excluding dividends) I still think the stock has plenty of room left to run. Today I’m going to explain why.

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Cash is king

When the oil price collapsed in late 2014, Shell’s management jumped into action and almost immediately started to restructure the business.

Four years on and the firm is virtually unrecognisable. Costs have been cut across the business, and the company is now more profitable today with the price of oil at around $70 per barrel than it was back in 2013 when the price of the black stuff was above $100 a barrel.

What’s more, Shell now generates a tremendous amount of cash from its operations. Last year, for example, the group’s free cash flow, which is defined as cash from operating activities minus capital spending, was approximately $30bn. Of this total, $15.7bn was returned to shareholders via the company’s dividend and $4bn was used to buy back stock. The remainder was earmarked for debt paydown.

If this trend continues, I see no reason why the Shell share price cannot move back above 3,000p in the near term. Actually, I calculate the stock could be worth as much as 3,200p using the discount cash flow valuation technique.

Putting a price on cash

My target of 3,200p is based on the assumption that the company can continue to throw off $20bn in free cash flow every year for the next 10 years, with free cash flow growing at a rate of around 3% per year.

You’ll notice I haven’t used the $30bn figure Shell reported last year, and that’s because I want to incorporate a margin of safety in my analysis. The company might be able to repeat this cash generation in 2019, but the price of oil is volatile, and we just don’t know what is in store for the group over the next five years. So, I would rather use a conservative forecast than an optimistic one.

That’s how I think the Shell share price can get to 3,200p in the next few years. This forecast should hold as long as the price of oil does not collapse back below $50, and with the US once again increasing its sanctions against Iran, it doesn’t look as if this is going to happen any time soon, so I am reasonably confident in the figures above.

Income champion

As well as being undervalued by around 23% according to my calculations, shares in this oil giant also support a market-beating dividend yield of 5.6% at the time of writing.

With the distribution being covered twice by cash generated by operations, it looks as if this payout is here to stay, implying investors will be well rewarded with both income and capital growth over the next few years.

That’s why I think Shell is a FTSE 100 bargain worth adding to your portfolio today.

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Rupert Hargreaves owns shares in Royal Dutch Shell plc Class B. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.